Friday 22 July 2011

Once again the day is saved...

...At least for now. It's hard to escape the feeling that each time an agreement is made at a European Council summit, it's only a matter of time (usually 3-6 months) before we're back in superhero mode again. Still, there seems to be something more to this deal than the simple bail-outs (or loans as they're normally called). The agreement's outline can be found here (PDF).


First of all, Greece will get more loans - and more cheaply - to help fight its economic crisis: €109 billion. Structural funds and European Investment Bank funds will be directed towards helping Greece stimulate growth, and there will be some voluntary private sector involvement which will be for Greece only (a bizzare situation where creditors are seemly asked to take a partial default on the basis of what they can afford out of the goodness of their hearts).

And the rest...

All three countries will benefit from a interest rate reduction on the loans to 3.5% (for Ireland this is a 2% reduction), and the loans will have to be paid off in 15 years (at a minimum) rather than the previous 7.5 years. This should make it easier for the countries to implement their austerity programmes as it eases the economic and political pressure on the governments.

In Ireland the interest rate reduction is a great victory for the government. During the election campaign the (now) coalition parties had been campaigning for a negotiation of the EU/IMF deal for lower interest rates and for the burning of some bondholders. The restriction of voluntary private involvement in the scheme to Greece means that partial defaults on the private debts in Ireland are unlikely for now. I say for now because there's resentment in Ireland at having to pay back all the private debt and that the private sector is not taking any hit, and now it will be harder to argue morally, and politically, why there should be movement on this in Greece but not elsewhere. It gives the impression that being the golden pupil of the bail-out class doesn't win you any rewards. I wonder if the market will really see private investor involvement in the Greek deal as a one-off.

Also important is what Ireland might have conceded for this interest rate reduction, and hat it means for the Eurozone's economic policy. The Eurozone heads note:

"[W]e note Ireland's willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework."

Since Ireland's corporate tax rate has become iconic and synomous with Irish economic success, the scale of this concession will be heavily debated: is it just a commitment to negotiate? Does it commit us to common tax policies?

I actually think that this is a victory of sorts for Irish diplomacy (well, good use of circumstances at least). It seemed like a raise of Irish corporate tax might have been a condition for a drop in interest rates - in other words, Ireland would unilaterally raise its tax rates without European harmonisation. Since this would have been Ireland and not the EU deciding this, no referendum would need to be held. However, if it comes to a EU Directive, then the Irish government could hold a referendum on the subject, citing it as a constitutional requirement (although I doubt the extent to which it might be one). It's hard to know if that's exactly the case yet, but by having the discussion at a pan-European (or pan-Eurozone) level, Ireland's diplomatic position is improved, not least because it can try to build coalitions around its positions.

Biggest loser: ECB?

The Europeans Financial Stability Fund willbe given several new powers. It can:

"- act on the basis of a precautionary programme;

- finance recapitalisation of financial institutions through loans to governments including in non programme countries;

- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion."

If the EFSF is able to intervene in non-programme countries to be a lender of last resort to the banks,* then this would dilute the power of the European Central Bank. It's been widely noted that the ECB's loans of €120 billion to Irish banks gave it a lot of power, and that it was a big player in the events leading to the Irish EU/IMF deal. With another institution, created without treaty change, able to provide alternative credit in a crisis, it could be a way of Member States preventing the ECB gaining a strong hand in their economies during times of crisis. It will be interesting to see if this will change the institutional balance in the Eurozone.

*Technically it can't lend directly to the banks, but it lends to the Member State who then lends to the banks. This would also be done at a higher interest. It also means that there are aspects of EFSF loans to banks which make them less attractive than ECB loans, but it does show how wary the Member States are becoming of the ECB's power if they've created a way of circumventing its role as a lender of last resort, even in non-programme countries.


  1. An unrelated question which I'm trying to get an answer for.

    Now that the European Union Act 2011 ( has passed, in theory the UK can't confirm certain changes without a referendum.

    But in the UK parliamentary system, the parliament (if it so wishes) can just change this law and then pass a treaty without a referendum. So - what's the point? Am I missing something?

  2. The UK Constitution states that Parliament is supreme, so it's not bound forever by the European Union Act 2011, and Parliament can ultimately decide whether or not to refer a Treaty to a referendum. However, there may be a political cost to preventing a referendum.

    A second point is that there is only a requirement for a referendum if changes in certain areas are made - e.g. there's no referendum for EU enlargement treaties. So there doesn't have to be a referendum for every EU treaty, but a Lisbon-esque treaty would require a referendum.